Trump’s Federal Grant Freeze: Economists Warn of Ripple Effects

Starting Tuesday, Jan. 28, 2025, at 5 p.m. Eastern Time, the White House will pause federal grants and loans while the Trump administration reviews its spending to ensure it follows President Donald Trump’s executive orders.

These orders target changes to policies related to transgender rights, environmental justice, and diversity, equity, and inclusion (DEI). Federal agencies have been instructed to assess their financial aid programs to determine which ones might be impacted. Medicare and Social Security benefits will not be affected.

The administration emphasized that this pause is temporary, and aims to ensure that federal funds are used in a manner consistent with the President’s policy objectives.

Opponents, such as Sen. Patty Murray and Rep. Rosa DeLauro voiced strong concerns in a letter to Matthew J. Vaeth, the acting director of the Office of Management and Budget, warning that these actions could disrupt federal programs.

Newsweek has consulted economists and experts in public affairs to evaluate how the freeze could impact overall economic growth and public services.

From Dr. Josh Bivens: Pausing Federal Grants Is Reckless and Could Cause a Steep Recession

The short-run impacts of a federal grant freeze are dire and the questions they raise should make it obvious how gratuitously reckless this idea is. Will rural hospitals get Medicaid reimbursements for the services they provide? Will nursing homes receive payments for care they’re providing to elders? Will schools bounce checks and be charged late fees because Title I grants that finance ongoing operations are disrupted?

The long-term consequences would be catastrophic. They would be guaranteed to cause a steep recession—the Federal government gives $1 trillion in grants to state and local governments alone, sucking any significant portion out of the economy would represent a huge economic shock—and the valuable work done across governments could be fatally compromised.

For example, will NIH medical trials aimed at detecting and thwarting the next pandemic or providing cures for cancer be defunded? Will economic data collection that provides the backbone of private-sector investment plans no longer happen? Will there be a rolling series of shutdowns of college and universities that will thwart the upward ambitions of the current generation of young Americans?

Nothing about this policy is aimed at improving peoples’ lives, it’s a bizarre ideological witch-hunt that the vast majority of Americans just couldn’t care less about—but they will care a lot if their local hospital or school is fatally compromised as collateral damage.

Josh Bivens, Chief Economist and Research Director, Economic Policy Institute (EPI).

From Dr. James K. Galbraith: The Psychological Impact of Pausing Federal Grants is Serious

Since most grants are allocated by law, it seems unlikely that the freeze will last for long or that the direct economic effects will be large. The psychological impact of the power grab may be more serious. And the mentality it revealed—a belief that “Marxist equity” has been driving federal policy—what can one say? Karl Marx would be laughing about that.

James K. Galbraith, Lloyd M. Bentsen, jr. Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin.

From Dr. Stephanie Kelton: Major Cuts Will Occur if Congress Fails to Uphold Its Constitutional Power

It appears to me that the goal is to test the waters and then, depending on how the courts respond to the flurry of legal challenges, to push the envelope much, much further.

Congress has the constitutional power of the purse. Presidents can sign or veto a budget, but the executive branch is supposed to ensure that laws passed by Congress are faithfully executed.

What is happening now is a brazen and unconstitutional attempt to disband the rule of law. The pause is already throwing local, state, and federal agencies into chaos. But it is a tiny example of what could come if they’re given the green light to move forward with a wholesale gutting of programs that tens of millions of Americans rely on. Keep an eye out for major cuts to programs like Section 8 housing, WIC, LIHEAP, etc.

Stephanie Kelton, Professor of Economics and Public Policy, Stony Brook University.

From Dr. David Mednicoff: The Federal Grant Freeze Will Result in Job Loss and Economic Setbacks

The federal grant freeze will hurt universities and research institutes, both public and private. This, in turn, will result in the temporary layoff or permanent loss of a significant number of middle class jobs in communities throughout the country.

This move will hurt the buying power of many Americans, and, therefore economic growth, as well as set the U.S. back in scientific research, in relation to our global rivals. It’s hard to see this initiative as being grounded primarily in helping the economy.

David Mednicoff, Associate Professor of Middle Eastern Studies and Public Policy.